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Modified over 4 years ago
1 © 2007 ME™ - Your Money Education Resource™ See page 127 Defined Benefit: monthly check for remainder of life Even better if it: increases each year Defined Contribution: withdraw account balance during retirement Sustainable withdrawal rate: 4 – 5% Investment risk Life Expectancy risk Can outlive money… Defined Benefit vs. Defined Contribution Pension Plans
2 © 2007 ME™ - Your Money Education Resource™ Defined Benefit Pension Plan Disappearing 112,208 plans in 1985 Less than 30,000 plans in 2005 Life Expectancy Risk Falling Investment Returns
3 © 2007 ME™ - Your Money Education Resource™ Plan Limitations on Benefits and Contributions Defined Benefit Plan Annual Benefits Lesser of $195,000 for 2010 100% of the average of the employee’s three highest consecutive years salary
4 © 2007 ME™ - Your Money Education Resource™ Plan Limitations on Benefits and Contributions (2 of 3) Defined Contribution Plans Maximum contribution for the year Lesser of: 100% of an employee’s compensation, or $49,000 for 2010 Limit consists of Employer Contributions, and Employee Contributions, and Elective deferral contributions Limited to $16,500 for 2010 per year. Additional $5,000 for 2010 for age 50 and older.
5 © 2007 ME™ - Your Money Education Resource™ Distributions: Pension Plan/Normal Retirement Age Joint and Survivor Annuity after retirement Annuity for participant and spouse Spouse: 50% - 100% of joint annuity Continues even if remarry Automatic for defined benefit plans Elect out Increase monthly payments Spouse must sign waiver When should this be done?
6 © 2007 ME™ - Your Money Education Resource™ Distributions:Pension Plan/Normal Retirement Age Rollovers to IRA or other qualified plan Tax-free if within 60 days of distribution Subject to withholding tax of 20% Direct rollovers: trustee to trustee No withholding Lump sum distribution Present value of future benefits When would you take this? Life expectancy Interest rates: now use corporate bond rates
7 © 2007 ME™ - Your Money Education Resource™ Distributions Prior to 59½ Subject to a 10% early withdrawal penalty unless on account of an exception: Death, Disability, Strict definition of disability (similar to Social Security) Separation from Service after the participant attains age 55 Qualified Domestic Relations Order.
8 © 2007 ME™ - Your Money Education Resource™ Distributions Prior to 59½ Subject to a 10% early withdrawal penalty unless on account of an exception: Substantially equal periodic payments after separation from service RMD amount Start small; get bigger Fixed periodic amount over life expectancy Payments must continue for later of 5 years or until 59 1/2 Medical expenses in excess of 7.5% of the participants AGI, or Don’t want this…crummy insurance
9 © 2007 ME™ - Your Money Education Resource™ Minimum Distributions First minimum distribution must begin by April 1 of the year following the year in which the participant attains the age of 70 ½. Exception: A participant who is still employed by the plan sponsor may delay the first minimum distribution until April 1 of the year after the participant terminates employment (a >5% owner cannot use the exception).
10 © 2007 ME™ - Your Money Education Resource™ Minimum Distributions All other minimum distributions (after first year) must occur by December 31 of the year. Tax equal to 50% of RMD if not taken No RMD required in 2009 Does not apply to Roth 401(k); Roth IRA Must take RMD from all qualified plans IRAs: take one RMD for all IRAs
11 © 2007 ME™ - Your Money Education Resource™ Calculating the Required Minimum Distribution Required Minimum Distribution = Fair Market Value of Participant’s Account at December 31 of the preceding plan year* Distribution period determined based on participant’s age at December 31 of the distribution year. Generally divide by factor starts at 27.4 for age 70 26.5 for age 71 Factor continues to decline When will account be liquidated?
12 © 2007 ME™ - Your Money Education Resource™ Distribution Period Participant receiving payments Single Spouse isn’t trophy Use Uniform Lifetime Table: page 324. Trophy spouse (> 10 years younger) Use Joint Life Table on pages 327-327 Greatly reduces RMD
13 © 2007 ME™ - Your Money Education Resource™ IRAs – Contribution Limit Traditional and Roth Generally, Lesser of $5,000 ($6,000 for age 50 and over - 2010) or Individual’s earned income. Subject to limitations based on income Can divide contribution between a Roth/traditional IRA Attainment of age 70½ can no longer make traditional IRA contributions. Can contribute to Roth IRA.
14 © 2007 ME™ - Your Money Education Resource™ IRA Investment Options Permitted: Cash Stocks Bonds Options (Often limited by custodians) U.S. Gold, Silver, and Platinum Coins Real estate Not Permitted: Life Insurance Collectibles: beer cans; art, etc. Other Coins
15 © 2007 ME™ - Your Money Education Resource™ Annuities Partially tax-free return of adjusted basis. Partially ordinary income: Determined by inclusion/exclusion ratio
Chapter 16 Retirement Planning Looking Ahead Sound retirement planning involves understanding: –Threats to secure retirement –Options available to protect.
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